Confidence in Europe has soared over the last year, according to Berenberg’s analysis of the European Central Bank’s balance sheet, prompting its strategy team to speculate that the eurozone crisis is nearly over.

Fear put to flight

Holger Schmieding, who leads Berenberg’s team, says households, companies and banks needed to find liquidity from somewhere when they lost trust in their business partners during the eurozone crisis. Banks turned to the European Central Bank and, as a result, the size of ECB’s balance sheet peaked at 33% of the eurozone’s Gross Domestic Product in 2012 (see chart).

But banks' demand for central bank liquidity has fallen now they have confidence in the promise made by ECB president Mario Draghi to supply as much of it as needed. Trade between third parties has resumed and Berenberg says tension has eased: “Leading indicators are up.” Last week Draghi confirmed he saw no need to cut interest rates from their current 25 basis points, given economic recovery in certain countries.

According to Schmieding, the size of the ECB balance sheet has fallen to less than 24% of eurozone GDP, not much higher than the low point of 21% struck before the euro crisis erupted. Schmieding says confidence has risen: “The size of the ECB balance sheet is a good barometer of financial fear.”

He said he was tempted to say the eurozone crisis is over for good now capital is flowing into peripheral European economies and bond yields have fallen. He added: “Most importantly, small problems – such as the botched first bailout deal for Cyprus – no longer spread contagion."

But he warns of one outstanding problem ̶ the absence of a verdict on eurozone emergency rescue measures by the German Constitutional Court: “The verdict, now expected in February or March, could spark a new crisis by dismantling the region’s anti-contagion defences. We think this is unlikely but not impossible,” he said.

Berenberg expects growth in Europe this year, although the current stress testing of bank balance sheets by the ECB will produce headwinds. Schmieding has frequently argued European austerity measures are working. If the test proceeds smoothly, Berenberg believes Spain, Portugal, Ireland, plus probably Greece and Cyprus, will reap rewards from reform in 2014.

Elsewhere, US consumer confidence bounced back in December after falling in November and October, according to official data supplied by US Conference Board, whose consumer confidence index jumped from 72 to 78.

Related

Strategist Dan Geller compiles his own so-called “money anxiety index” which uses a raft of US official data to assess confidence. In a release published before the Conference Board report, he said: “2013 was the first year in which the level of consumer financial anxiety declined to its lowest level in four years. The Money Anxiety Index decreased by more than 10 points throughout the year – from 92.4 in January to 81.9 in December of this year.”

Growing confidence has boosted equities over the last year and a majority of strategists, including Berenberg, expect more gains in 2014. Equities need underlying confidence in the economy to perform. In the absence of such investor confidence bonds, which reassure investors by making firm promises on income and redemption, become much more alluring.

The State Street Global Exchange investment confidence index, published this week, rose from 91.2 to 95.9 in December, as sentiment continued to recover in the fourth quarter. This remains below the 107.7 struck in July before the index was hit by a panic over suggestions that the Federal Reserve that it might tighten monetary policy. But the current level is well ahead of the 81.4 registered a year ago.

Russ Koesterich, BlackRock’s global chief investment strategist said in a report published over Christmas: “We would advise investors to continue overweighting stocks in their portfolios. Equities may not be as inexpensive as they were a year ago, but they remain more attractive than bonds and cash.”

--write to mfoster@efinancialnews.com

This article has been updated to include the State Street confidence index data